Senate Passes Wall Street Reform: Impact?

You might be wondering what’s in the 2,300 pages of financial services reform that has just passed Congress. It now goes to President Obama for signature.

Relatively few of the pages of legislation touch on real estate finance directly. Much of the bill addresses the way hedge funds, banks, and other financial services companies are regulated. One of its centerpieces is the new Financial Stability Oversight Council, which will have the job of issuing alerts when it sees lending practices becoming too risky.

But there are pieces of the legislation that could impact you.

First, administration of the Real Estate Settlement Procedures Act (RESPA) will move out of HUD and into a new agency in the Federal Reserve called the Consumer Financial Protection Bureau. That bureau will also administer the Truth in Lending Act (TILA), which is overseen in the Fed.

I interviewed NAR Senior Legislative Analyst Tony Hutchinson about the bill in mid-July and he said the agency shift by itself won’t introduce anything new. In fact, HUD staff that administer RESPA today will probably administer RESPA tomorrow; they’ll just do it under a different agency name.

Even so, the move is something NAR will be looking at closely, because HUD and the Federal Reserve bring different cultures to settlement services, and it’ll be important to see if the Fed introduces subtle shifts in the way RESPA is administered.

Importantly, when the legislation was being written, NAR worked closely with lawmakers to ensure that an unmistakable firewall is maintained between the two very different businesses of financial services and real estate brokerage. That was both a defensive and a preemptive move on NAR’s part, because original language in parts of the bill seemed so overly broad that it risked allowing brokerage practices to be inadvertently lumped into rules meant for financial services. The so-called carve-outs that NAR secured in Congress are meant to make clear that lawmakers intended regulators not to confuse the two at some point down the road.

Second, the kinds of exotic loans that are widely recognized for their destabilizing effect on mortgage markets several years ago will face a much different regulatory environment in the future. That might seem like a non-issue today, since so few if any of these loans are being originated now. But lawmakers are looking ahead and saying that once financial markets return to something close to normal, the days of too-easy loans won’t return as well. It’s not that those loans will be a thing of the past. As NAR argued during the crafting of the bill, those loans have a place when they’re reserved for the borrowers they were originally designed for (investors and other sophisticated borrowers, and those with uneven income streams that don’t come nicely laid out on W-2 forms). Rather, those loans will be allowed as long as lenders reserve them for borrowers who can be expected to pay them back and that take steps to ensure borrowers have the financial wherewithal that they say they have.

In our interview, Hutchinson said these changes will lead to slightly longer processing times for subprime and other exotic mortgages but the increased time shouldn’t be an issue for your business. Importantly, there’s nothing in the bill that would impact plain vanilla fixed and adjustable-rate mortgages.

Third, investors and homeowners who want to provide seller financing to buyers will be able to do so as long as they limit those transactions to three times a year. For most homeowners, including those with several properties, that amount of flexibility is reasonable—certainly it’s a big improvement over what was in the bill up until just a few weeks before the House-Senate conference committee took up the legislation. Originally, property owners were limited to a seller-financing transaction only once every three years. The intention of such a tight limitation was to protect against some abuses that were seen in markets during the housing boom, but NAR was able to make the case that too many regular property owners would be hurt by a remedy that was intended to stop a minority of abusers.

Fourth, although the legislation leaves reform of secondary mortgage market companies Fannie Mae and Freddie Mac for later, it does start to lay the groundwork by requiring regulators to come up with some initial planning by certain deadlines, the first being in early 2011. In other words, the federal government is served notice that the process for reforming the two companies along with the Federal Home Loan Banks must start in earnest next year.

The bottom line on the legislation is that, for such a sweeping set of reforms to our country’s financial services sector, real estate is impacted surprisingly little. Really, all the changes are at the margins, and much of what NAR focused on during the writing of the bill was the all-important carve-outs to ensure the legislation does nothing to change the separation between banking and commerce. To that end, REALTORS® efforts in this area were an important success, measured less by what the legislation does than by what it doesn’t do.

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I find it very interesting that one of the sponsers of this legislation, was himself caught in some questionable mortgage lending practices. On the outside the protections look good for the industry, but what concerns me is allowing the Federal Reserve to be the regulator of this new Consumer Protection Agency, and also in charge of the RESPA and other controls over our profession. Once this group gets their hands in our pie, look out. What seems a good thing might just come back and bite the Real Estate Brokers and Agents in the you know where.

Bill

Another example of government waste and corruption.

A look behind the curtain of the Wall Street Reform bill reveals nothing more than self-interest, business as usual and more power and influence to Wall Street instead of the free market. And as if the permanent bailouts and too big to fail advantages already in the Obama Dodd bill aren’t enough for the greedy banks, a proposed amendment offered by former Bank of America executive Sen. Kay Hagen is a perfect case and point.

Hagen’s amendment proposes to “protect consumers” from lenders whose market includes lower and middle class Americans — the type of folk that Bank of America wouldn’t lend a dollar to — despite trillions in federal support.

These loans, often called “payday loans,” provide short-term cash to Americans who need money to repair their car, fix their house, even pay a medical bill, while they wait for payday to payback the loan. The Hagen amendment would limit competition for the big boys at Bank of America but allow consumers to take cash advances from their credit cards.

The Hagan amendment does not protect consumers from outrageous and exorbitant fees that Bank of America charges consumers. In fact, its actually going to cost consumers more in fees. A Bank of America customer with a two-week overdraft of $66 results in a $30 fee — an APR of 1,165%! In fact, last year Wall Street banks charged consumers $38 billion in overdraft and NFS fees. And by putting the traditional short term lenders out of business, the Hagan amendment will force more strapped consumers to resort to paying overdraft fees that will earn big banks an additional $14 billion a year.

Its not surprising to find out that Sen. Hagan has received over $315,000 in political contributions from commercial banks and financial institutions including $19,000 from Bank of America..

The STATIST effort to reach into private transactions- where a seller is willing to finance a sale for the buyer with no involvement by “regulated” banks smacks of unwarranted meddling in private contracts. Where does it end? It doesn’t if we continue to allow Statist’s to stifle freedom in order to impose the Statist desire to control, dictate and lord over what little remnant of freedom remains in America.

Victims or Villains

I wonder what sort of response the new Financial Stability Oversight Council would have had back, during the Clinton years, when the lending world was compelled by the government to make home ownership more affordable, when credit requirements were greatly diluted and lenders were coerced into making outrageous loans to people who, by no rational standards, should have been approved.
Please read this article from the NY Times, September, 1999: http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

I’m frustrated with legislation that is so lengthy, jumbled and vague that we the people are left wondering what it really says and what its impact will really be. The term “unintended consequences” has gone from being cliché to symptomatic of the current magistrates’ perceived role as micro-managing nannies.

Putting limits on seller financing is outrageous and a clear violation of the spirit of free enterprise, capitalization and property ownership rights! It’s hard enough for the little guy to compete with the fat-cat banks in a true, free and open market. This restriction will simply further limit small investors’ options, forcing them, in many situations, to surrender their business (after only three loans per year) to Wall Street. The reason I love seller-financing is because it is free from the mountain of regulations, time-wasting processes and consequential fees of the Big Banking world. This new law will only grow the bureaucracy and direct more capital to the Banks and siphon more away from the little guy.

I am truly grateful for the efforts of NAR in working to shrink the impact of this freedom-reducing legislation. I encourage those at the NAR (and citizens everywhere) to be as tireless in your opposition to this onslaught of regulation as the current regime is in its assault.

Greg

This bill, like everything coming out of DC, is a disaster on many levels. One particular section of it pertains to mortgage lending. What it does is impose a cap on the compensation lenders and loan originators can make. Included within that cap are most of the general fees charged for a loan, so what’s left is drastically reduced. This means that on an average home purchase, a hardworking, diligent loan officer will take about a 45% cut in their gross pay.

Smaller loans won’t even be worth the trouble. Reports have already surfaced indicating that many loan originators are leaving the industry.

The net result of this is that homebuyers may someday soon have no place to get a mortgage except from large banks. Private lending could easily be forced out of existence, which is probably the ultimate goal. Banks are notorious for poor mortgage service, and are exempt from the full disclosure now required of mortgage brokers. In other words, these nanny state laws, passed to “protect” us and to insure that every borrower knows all about the loan they’re getting, are actually forcing people to be at the mercy of the government-backed institutions who can avoid that very disclosure. Banks make all sorts of “back-end” profits on mortgage loans, about which the borrower, by law, need not be informed.

Bank loan officers also are not required to meet the strict standards imposed on mortgage brokers. In fact, I’m not sure a license is even mandatory, at least in my state. As a contrasting example: In addition to the massive disclosure requirements which reveal every penny a broker-based loan originator makes on every transaction, each year they have to pass 2 annual exams, and must also periodically get fingerprinted and pass a background check the same as those necessary to carry a concealed handgun!

This latest foolishness from Washington will have a devastating effect on home purchases and the real estate market. Coupled with the forthcoming cut of FHA allowable seller concessions from 6% to 3%, I believe an epic disaster is on the horizon.

Chris Vandegriend

How can your say “real estate is impacted surprisingly little”? Anything that impacts lending impacts real estate. There are not that many buyers out there paying cash for homes, and home financing which has been greatly impacted by the outrageous acts of the politicians who are in bed with wall street execs has impacted residential real estate. Everything in our economy is tied to real estate!